Blogging From Beijing

Author: piercecnorton

The US-China relationship has reached its lowest point since the Mao era. US hope for a moderate and economically reformed China has faded while China, as it has since the CCP took power, remains ideologically entrenched in communist authoritarianism.

Communist China continues to do what it has done since its founding: obfuscate, threaten, and place the party’s perseverance above all. America, however, is charting into new waters while sailing rudderless with no mission, sense of history, or clear directive.

Chinese consistency

It is important to know that communists do not believe in truth. Truth is a fabrication of the ruling class. In China, truth, regardless of fact, is dictated by the state. Note the following four scenarios where China says one thing and does the opposite.

Now so many days have passed, and some in the US still claim China should be held responsible for the COVID-19 in the US. Don’t they feel guilty or ashamed? They are trying to shift the biggest blame of the century to China and make it the biggest scapegoat….

The pandemic is in some way like a magical mirror that exposes a person’s morality and character to the fullest extent. The virus knows no ideology, border or race. The destinies of all countries are closely intertwined. No one can make up for lost time by slandering others or shifting the blame. The only way to defeat the virus is through solidarity and cooperation.

This messaging from the CCP flies in the face of doctors who were silenced and jailed for raising Covid-19 concerns.

3.) China is still moving backwards economically towards more state control. From Rhodium Group and The Asia Society’s China Dashboard detailing Winter 2019 economic reform:

The approach to policy…reveals Chinese leadership looking for modest, piecemeal ways to make some progress, not bold moves. The virus emergency stymies even that minimal activism. In the financial system, the emergency measures rolled out to avoid defaults are making the debt problems worse, and this is true in other areas

Chinese media, however, drones about China creating a fair system for the world.

4.) China, after expelling American journalists, is lamenting about the treatment of Chinese ‘journalists’ (Source):

美方对中国媒体驻美机构进行的政治打压，已成为中美双方良性互动的绊脚石。傲慢与偏见都不是正义，霸凌欺蛮终不能得逞.

The political suppression of the Chinese media in the United States by the United States Government has become a stumbling block for the positive interaction between China and the United States. Pride and prejudice are not justice, and bullying will never succeed.

America Asleep at the Wheel

The JCPOA, the Iran Nuclear Deal, was largely criticized for not addressing Iran’s nefarious behavior in the Middle East. The United States under the leadership of Donald Trump was supposed to renegotiate the deal or embrace a ‘no-deal’ that better aligned with American values.

The Phase One Trade Deal with China mimics the JCPOA. Not only does the deal not address China’s nefarious behavior, it represents no American values. It is wishful manufactured trade.

During the ‘trade war’ China didn’t reduce imports of US manufactured goods excluding autos and planes because China has already squeezed out all other American industrial imports. China’s revealed capacity to manage its commodity imports over the course of the trade war suggests that it could meet its 2020 agriculture and energy commitments.

But, as anyone who has spent time in China will tell you, what the China’s state gives, China’s state takes away.

It is important to remember that the Obama administration obtained a cyber security deal and promises to not militarize artificial islands in the South China Sea, and the CCP broke both agreements. Our current agenda with China doesn’t mention human rights (the detention of more than one million Uighurs), violence in the region (militarizing the South China Sea), or the mercantilist trade policies that put the US and China here in the first place. America moved the goal posts from human rights to managed trade in nuts, lobster, chicken feet, and soybeans.

Instead of raising issues that define the country, America’s objectives flow with the current news cycle.

Why does the President of the United States language on Chairman Xi change when Weibo censors language supporting America? Does this only apply to China?

America, and I can’t stress this enough, through its foreign policy doesn’t stand for anything. There is no such thing as ‘country X policy.’ Policy must fit into a framework that is applicable to a region. Good China policy derives from a good Asia policy. Good Asia policy is derived from American values. ‘America First’ isn’t a value, an ethic applicable to how you treat people you don’t know. It is narcissist and erodes the moral fabric of the USA.

It was the former president of the European Commission who announced in the spring of 2011: “When it becomes serious, you have to lie.” Jean-Claude Junker indicated there was a posttruth approach to public discourse. He was wrong. China has not only murdered Tibetans, Mongolians, Falun Gong practitioners, students in Tienanmen Square, land holders, intelligentsia, and Uighurs, China has erased them from history. China is as China has been since 1949. The United States has retreated from economic fairness, the South China Sea, human rights, and Asia. Instead of exhibiting leadership at the World Economic Forum in Davos this year, Trump broke his tweet record. If communists have a disposition towards lying and self-preservation, America is currently disposed to abdicating leadership in Asia.

The analytical community will pore over the entrails [of the reform agenda] to analyse whether the spirit of market-based reforms continues to flourish for the future. Or whether it has begun to fade amidst a more general Chinese political and ideological redirection to the left. Or just as problematically, for economic reform to die at the implementation level because of confusing political and policy signals from the centre, meaning that it is much safer to just keep your head down. Or because there are limited local incentives, either personal or institutional, to actively prosecute reform which inevitably generates local conflict with deeply entrenched vested interests. Or, more likely, an unholy cocktail of the above, collectively reinforcing a natural predisposition towards bureaucratic inertia.

-Kevin Rudd

President of the Asia Society Policy Institute and Former Australian Prime Minister

As this blog has stated many times before, Chinese economic reform is dead. China, for the past decade, has seen a systemic rise in debt as state influenced asset allocation becomes increasingly inefficient. Three years ago Chinese credit growth was 16.6% . With over $40 trillion in bank assets, it will not likely return to previous growth levels. Even so, the current pace of credit growth, 10%, once again exceeds nominal GDP growth, meaning that China is adding to economy-wide leverage rather than moderating the debt load.

In 2017, General Secretary of the Chinese Communist Party Xi went to Davos to promise to defend globalization and reform the Chinese economy.

The SOE share of listed company revenue in “normal” industries–those that Beijing identified as non-strategic and commercial–increased significantly, to 15.6% in 1Q2019 from 14.8% in 4Q2018. This increase is the first since 1Q2016, and it shows that the state is advancing even in industries where Beijing set out to withdraw influence in the 2013 Third Plenum Decisions. Industrial SOE assets grew by 4% year-on-year in 1Q2019, faster than private asset growth of 1.4%. SOE profitability flattened in 1Q2019, suggesting that past policies framed as reform (e.g., capacity cuts, deleveraging) have failed to improve SOE efficiency. Returns on SOE assets peaked at 4.5% in 3Q2018 and then declined to 4.0% in 1Q2019.

In 1Q2019, the State Administration for Market Regulation (SAMR) reviewed 28% of foreign-involved mergers but only 9% of domestic mergers. At the same time, China’s poor judicial transparency has deteriorated further. Courts publish less than 5% of the competition and intellectual property disputes they handle each year, with significant delay. In 1Q2019, the courts even removed previously published cases (400–600 cases a year) from their websites.

Communism Guides the Economy

I recently read through the 国务院关于深化国有企业改革的指导意见 (Guiding Opinions of the Central Committee of the Chinese Communist Party and the State Council on Deepening the Reform of State-owned Enterprises) which was published in 2015. Here are two interesting quotes with translations following:

1.) 坚持党对国有企业的领导。这是深化国有企业改革必须坚守的政治方向、政治原则. The Party’s leadership over SOEs shall be upheld. This is the political direction and principle that must be held fast to in deepening SOE reform.

2.) 企业党的建设全面加强…工作体系更加完善，国有企业党组织在公司治理中的法定地位更加巩固，政治核心作用充分发挥. The Party building of enterprises shall be comprehensively strengthened… In addition, the Party organizations of SOEs shall enjoy a more solid statutory position in corporate governance, and fully display their core political role.

Chinese reform has regressed towards China’s bureaucratic mean- communism and state control. As China releases GDP numbers, quarterly updates, and policy guidelines, readers should put those documents into a clear framework: China is slowing, debt is growing, and the state is consolidating.

Lastly, here is a quote from the EU Chamber of Commerce’s report “18 Months After Davos:”

One of the largest concerns for European players in the healthcare equipment sector is the CM2025 initiative. The China Manufacturing 2025 Key Area Technology Roadmap, which was drafted under the guidance of the China Academy of Engineering, sets domestic market share targets for Chinese players in the healthcare equipment sector. International players are concerned that any available support will only be extended to domestic companies. So far, there has been no obvious effect on the healthcare market, and the European Chamber has been assured by the Chinese authorities that this implementation strategy is not to be taken seriously.

Short thoughts on Chinese zoos today. Do not, under any circumstances, go to a zoo in China. I like China. I love zoos. Chinese zoos are beyond atrocious.

In 2017 I visited Chongqing. Famous for its fiery cuisine and large rivers (the Jialing joins the Yangtze here), Chongqing is a comfortable visit for tourists- particularly food tourism.

Eating all day is something I recommend in Chongqing. Going to the Chongqing zoo is not something I recommend. In fact, going to any zoo or aquarium in China is not something I recommend. The animals are treated extremely inhumanely.

Appropriate living conditions for lions

These metal cages look empty!

No, those cages house the monkeys!

Engaging and stimulating environment for birds of all types

It is surprisingly normal to see tanks in China with more dead fish than living fish

If you’re into monkeys housed in empty, small metal cages, zoos in China are the place for you. There is always one exhibit that is nice- the panda exhibit. Make of that what you will.

The Trump administration’s August 5th decision to designate China a currency manipulator is largely meaningless. Officially, labeling China a currency manipulator is the first step in logging a complaint with the IMF, an organization that will continue to do nothing of substance regarding China.

China’s devaluing currency makes a lot of sense in that it better spreads the cost of America’s tariffs to the world. I also doubt China’s corporate $501bn in outstanding dollar debt is much of a liability- although with Chinese debt, it is hard to say. All in all, there isn’t a lot of meaningful news in this; its all symbolism.

The biggest takeaway regarding America’s China policy is how congress is stepping up. Yes, you read that correctly. Congress, touting a whopping 17% approval rating, has taken a lead when it comes to China policy. First the 2019 NDAA (National Defense Authorization Act) requires the Trump administration to provide a whole of government strategy for competition with China and allocates funds for boosting capacity in the South China Sea. Second, there are now bills being proposed to tax foreign funds coming into the United States.

The Competitive Dollar for Jobs and Prosperity Act would task the Federal Reserve with achieving and maintaining a current account balancing price for the dollar within five years. It would create an exchange rate management tool in the form of a Market Access Charge (MAC)—a variable fee on incoming foreign capital flows used to purchase dollar assets. The Fed would set and adjust the MAC rate. The Treasury Department would collect the MAC revenue. The result would be a gradual move for the dollar toward a trade-balancing exchange rate. The legislation would also authorize the Federal Reserve to engage in countervailing currency intervention when other nations manipulate their currencies to gain an unfair trade advantage.

America would no longer be the free market for non-free markets to sterilize their surpluses. Even if it doesn’t pass, this is huge.

Maybe in the future, being labeled a currency manipulator will have bite.

I highly recommend China watchers read this paper by political scientist Lee Jones and Zeng Jinhan. It provides a great look into how Chinese policy is implemented:

Foreign-policy steering happens through several important mechanisms. The first is top leaders’ major speeches, which are usually kept vague to accommodate diverse interests and agendas. Rather than ‘carefully-worked out grand strategies’, they are typically ‘platitudes, slogans, catchphrases, and generalities’, offering ‘atmospheric guidance’ that others must then interpret and implement. Examples include: Deng’s tao guang yang hui, whose meaning is ‘debateable’; Hu’s ‘harmonious world’ – ‘more of a narrative than a grand strategy’; and Xi’s ‘new type of great power relations.’ As discussed below, Xi’s vague 2013 remarks on the ‘silk road economic belt’ (SREB) and ‘maritime silk road’ (MSR) exemplify this tendency. [2]

Xi Jinping thought and Xi Jinping thought-study for communist cadre revolves around applying platitudes to local practice, matching national talking points to local policy initiatives. \Xi Jinping’s Speeches are completely devoid of any significant meaning, but local governments go to great lengths to mirror Xi’s lexicon. Take the Belt and Road initiative for example.

Disturbing quote from Mark Zuckerberg

The Belt and Road initiative is not driven by Beijing. Provincial governments and local governments have been tasked to create their own BRI projects.

From Lee and Zeng:

In 2013, Guangxi and affiliated business interests agreed with Malaysia’s Pahang state government to upgrade Kuantan port, including by developing a cross-country railway, road links and a US$3.4 billion industrial park. Guangxi subsequently leveraged BRI to expand its involvement. However, in September 2015, Guangdong province signed a rival agreement with Malaysia’s Malacca state, including a US$4.6 billion industrial park and a US$10 billion port upgrade.

There is little economic rationale for developing two world-class ports on the Malay Peninsula. These projects reflect not a coherent master plan but rather competitive, sub-national dynamics in both countries. Moreover, these micro-level dynamics clearly do not–indeed, cannot–add up to a coherent, macro-level network of infrastructure. Unsurprisingly, statistical analysis reveals no correlation between Vision and Actions [the official policy document guiding the BRI] six ‘corridors’ and projects on the ground, suggesting that the plan is failing even to guide investment activity in a broad sense.

Foreign policy has an excellent article which, among other things, quotes how the World Bank lauded Turkey’s Marmaray rail tunnel as an example of BRI investment, ” even though it is funded by a Turkey-EU-Japan consortium and appears to have no Chinese involvement.” BRI is less of a national strategy and more of an expansion of a specific part of China’s domestic political economy: local governments borrowing endlessly to fund infrastructure projects.

The thing is, local provinces are agile in aligning to federal programs to push their own initiatives. Again citing Lee and Zeng:

Only 14 provinces were invited to the NDRC’s initial OBOR symposium in December 2013, indicating a relatively tight circle of beneficiaries. Excluded provinces, however, quickly lobbied for inclusion, through forums like the NPC. Provincial universities and think tanks were encouraged to demonstrate locales’ historical links to the ancient silk road – generating the aforementioned publications boom. Local media were also enlisted, leading to a profusion of stories mentioning OBOR, from 543 in 2014 to 5935 in 2015, with coverage in virtually every provincial outlet. For example, Shaanxi and Henan provinces waged an intense public battle over which of them contained the start of the historical silk road Competition over the MSR’s ‘starting point’ was even fiercer, with rival claims from Fujian, Jiangsu, Guangdong and Guangxi. Provinces with weaker claims invented ‘starting points’ linked to geographical locations or commodities, like porcelain or tea, then even squabbled over these. Shandong and Hebei, for example, both claimed that their cities, Qingdao and Huanghua, were the ‘northern starting point.’

China is built from the bottom up, from province to federal government. Local media, local SOEs, and local projects are cooked to align to federal buzzwords. Even SOE structure is province-up. Look at CRRC’s subsidiaries pictured below.

CRRC is an active holding company comprised of many local companies. These local companies are unique in leadership, future plans, and corporate action. They shape the national SOE, CRRC.

In April of 2015, Xi Jinping declared that China will have a ‘toilet revolution’ (厕所革命). Much of the commentary and media coverage have struck a bemused tone and offered little analysis. China’s toilet revolution is a prism through which to examine how the central government takes account of popular opinion, how bureaucratic interests are championed by China’s top leaders, and how agencies can effectively implement national policy campaigns. The architect of China’s toilet revolution is Li Jinzao, former head of the National Tourism Agency. From 1998 to 2002 he served as mayor of Guilin, where he launched a local ‘toilet revolution’ to increase tourism. In 2000, his city built more than 849 new ‘tourism toilets.’

This is serious business. As head of the NTA in 2014, he designated April 1st as China Toilet Revolution Advancement Day and instituted an annual National Toilet Revolution Meeting on the first workday after the Spring Festival holiday. After catching the eye of Xi, the program went viral.

According to state media, between 2015 and 2017 the NTA was able to get the Ministry of Finance to allocate almost 1.8 billion yuan ($264 million) to subsidize toilet construction, funding which helped spur localities to invest a further20 billion yuan ($2.9 billion) of their own budgets into toilets over the same period. In November 2017, the NTA declared that 68,000 toilets had already been constructed or upgraded, exceeding its original target by nearly 20%. Consequently, the NTA announced a “New Three-Year Action Plan” that raised its original target of 57,000 to 64,000 new or upgraded toilets by 2020.

The take away here is that localities were quick to jump on a national project with serious merit and invested more than ten times what the ministry of finance allocated.

My photo taken at Tsinghua University. 向前一小步， 文明一大步 (advance one small step, culture/society advances one big step). It is a sign near a urinal telling men to urinate cleanly for the “rejuvenation of the nation.”Really: link

Chinese grand-strategy, from One Belt One Road and SOE structure to the massive amount of money spent on the toilet revolution, is almost always a post-hoc narrative that provinces use to justify their idiosyncratic tendencies and desires. Xi and China aren’t as centralized as commonly thought of.

1.) Recently, a lot of attention has been given to the financial health of SMEs (small and medium enterprises). These smaller companies have historically had access to less financial support, and Beijing has been explicitly concerned about lack of cheap credit available since the crackdown on shadow banking.

China’s central bank said on Monday that more loans have been extended to small firms in the first five months of 2019, heeding Beijing’s call to support the economy.

The number of outstanding loans to small and micro enterprises rose to 10.3 trillion yuan ($1.50 trillion) at the end of May, up by 21% year on year…

Truthfully however, access to finance isn’t the problem, local government debt is.

State firms under pressure to deleverage are finding cash by paying private companies later. The crackdown on shadow banking limited government access to credit, hindering government ability to pay the private sector.

2.) The Chinese government knows the extent of the debt burden. Premier Li Keqiang recently said, “抓紧解决政府部门和国有企业拖欠民营企业账款问题” (link) or “[Government must] grasp and resolve the problem of arrears owed by government and state firms to private enterprise.”

While China is attempting to deleverage, I am not sure how government’s can continue to finance large infrastructure projects. I, fundamentally, dont see any indication that capital allocation mechanisms have become more efficient or changed in any meaningful way.

4.) I am pessimistic about China’s debt servicing capability in the long term, but in the short to medium term, China can do a lot to kick the can down the road. Not paying private companies and hindering SME cash-flow is just the latest in China’s debt evolution.

Some of the photos I am going to post today are politically incorrect, but China is, by Western standards, not at all politically correct. In fact, I was inspired to post these in confidence after reading the following news story (emphasis mine):

“We got a 50-minute non-stop lecture, pausing only for translation, about this being a clash of civilisations,” said Adam Posen, the group’s president, who declined to say which member of the Politburo they met with. “And some of it was a bit extreme.”

Peterson Institute scholars said this lecture by their Chinese host focused on how the US was a “Mediterranean culture” based around belligerence and internal division, which explains why it has such an oppressive foreign policy…

I hope these seemingly random photos give you a unique, genuine perspective on what it’s like living in China’s capital.

In 2015 my company hosted a team building activity in an escape room type setting. The Chinese characters on the rug read, 超级密室 or Super Escape Room. The theme of this escape room was Jews escaping from Nazis.

As a tall white man, I got these type of invitations regularly. I once was paid about two hundred dollars to attend the opening of a new dental hospital in Taiyuan.

Security forces in Beijing really beefed up starting in 2016. Now, every bus I ride on has some uniformed security aboard. The above picture was taken in a hurry, because I was nervous to be caught filming security in Beijing. I was promptly caught taking this photo. The security man was nice and pleasant. He was floored to talk to a foreigner in Chinese. There are many different types of security services in Beijing. Their descriptions can be found here.

During Chinese New Year you could find these vans parked throughout Beijing. Inside the van sleeping were two to three men from the Chinese countryside. They sell fireworks. The blue jug is full of water, but if there was a fire, it would be useless in extinguishing the flames.

We woke-up the men around 3am. Pictured above is inside the shed adjacent to their van; it is packed with commercial fireworks. Now fireworks in the city are strictly limited and lighting of fireworks near the city center is somewhat controlled.

Pictured above are statues in the subway of Beijing. The theme of the pieces were race and class. The series revolved around overweight foreign races and sickly Chinese people. The black woman’s statue was common to take photos with, as the man pictured above is now doing.

Chinese crawfish are to die for. Sichuan cuisine, known for a spicy and numbing (麻辣) flavor profile, has mastered boiled crawfish. Served with a thick sauce, this type of dish alone is worth visiting China for. During crawfish season it is common for these restaurants to have very long waits.